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1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended March 31, 2004
Commission file number 1-4858
INTERNATIONAL FLAVORS & FRAGRANCES INC.
---------------------------------------
(Exact Name of Registrant as specified in its charter)
New York 13-1432060
--------------------------------------- --------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
521 West 57th Street, New York, N.Y. 10019-2960
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 765-5500
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Number of shares outstanding as of April 30, 2004: 94,357,390
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
(Unaudited)
3/31/04 12/31/03
---------- ----------
Assets
- ------
Current assets:
Cash & cash equivalents $ 11,796 $ 12,081
Short-term investments 483 474
Trade receivables 380,876 336,980
Allowance For doubtful accounts (16,472) (16,212)
Inventories: Raw materials 230,174 233,313
Work in process 18,519 15,815
Finished goods 202,386 205,503
---------- ----------
Total inventories 451,079 454,631
Deferred income taxes 63,873 66,070
Other current assets 60,925 48,648
---------- ----------
Total current assets 952,560 902,672
---------- ----------
Property, plant & equipment, at cost 1,016,513 1,010,397
Accumulated depreciation (514,813) (499,785)
---------- ----------
501,700 510,612
---------- ----------
Goodwill, net 647,566 647,226
Intangible assets, net 148,771 152,187
Other assets 91,429 94,195
---------- ----------
Total assets $2,342,026 $2,306,892
========== ==========
Liabilities and shareholders' equity
- ------------------------------------
Current liabilities:
Bank loans and current portion of long-term debt $ 49,992 $ 31,371
Commercial paper 146,932 162,933
Accounts payable-trade 109,063 104,028
Dividends payable 15,126 14,996
Income taxes 26,116 27,826
Other current liabilities 180,259 184,891
---------- ----------
Total current liabilities 527,488 526,045
---------- ----------
Other liabilities:
Long-term debt 679,161 690,231
Deferred gains 72,687 73,439
Retirement liabilities 210,112 210,031
Other liabilities 68,549 64,515
---------- ----------
Total other liabilities 1,030,509 1,038,216
---------- ----------
Shareholders' equity:
Common stock 12 1/2 cent par value; authorized
500,000,000 shares; issued 115,761,840 shares 14,470 14,470
Capital in excess of par value 85,684 95,138
Restricted stock (3,030) (3,952)
Retained earnings 1,537,336 1,496,104
Accumulated other comprehensive income:
Cumulative translation adjustment (56,612) (45,188)
Accumulated losses on derivatives
qualifying as hedges (net of tax) (10,094) (3,678)
Minimum pension liability adjustment(net of tax) (82,815) (82,815)
---------- ----------
1,484,939 1,470,079
Treasury stock, at cost - 21,213,323 shares in '04
and 22,032,132 in '03 (700,910) (727,448)
---------- ----------
Total shareholders' equity 784,029 742,631
---------- ----------
Total liabilities and shareholders' equity $2,342,026 $2,306,892
========== ==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED STATEMENT OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(Unaudited)
3 Months Ended 3/31
----------------------------
2004 2003
--------- ---------
Net sales $ 535,015 $ 466,224
--------- ---------
Cost of goods sold 306,786 270,447
Research and development expenses 44,648 38,962
Selling and administrative expenses 89,726 76,115
Amortization 3,699 3,158
Restructuring and other charges - 20,389
Interest Expense 6,457 8,113
Other (income) expense, net 1,425 2,526
--------- ---------
452,741 419,710
--------- ---------
Income before taxes on income 82,274 46,514
Taxes on income 25,916 14,497
--------- ---------
Net income 56,358 32,017
Other comprehensive income:
Foreign currency translation adjustments (11,424) 8,030
Accumulated losses on derivatives
qualifying as hedges (net of tax) (6,416) (821)
--------- ---------
Comprehensive income $ 38,518 $ 39,226
========= =========
Net income per share - basic $0.60 $0.34
Net income per share - diluted $0.59 $0.34
Average number of shares outstanding - basic 94,033 94,158
Average number of shares outstanding - diluted 95,126 95,281
Dividends declared per share $0.16 $0.15
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
INTERNATIONAL FLAVORS & FRAGRANCES INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(Unaudited)
3 Months Ended 3/31
------------------------------------
2004 2003
----------- -----------
Cash flows from operating activities:
- -------------------------------------
Net income $ 56,358 $ 32,017
Adjustments to reconcile to net cash provided by operations:
Depreciation and amortization 22,984 21,403
Deferred income taxes 5,387 (3,736)
Changes in assets and liabilities:
Current receivables (50,260) (38,602)
Inventories (64) 4,376
Current payables (6,819) 11,606
Other, net (6,311) (12,738)
----------- -----------
Net cash provided by operations 21,275 14,326
----------- -----------
Cash flows from investing activities:
- ------------------------------------
Net change in investments - (155)
Additions to property, plant and equipment (12,244) (11,300)
Proceeds from disposal of assets 542 5,662
----------- -----------
Net cash used in investing activities (11,702) (5,793)
----------- -----------
Cash flows from financing activities:
- -------------------------------------
Cash dividends paid to shareholders (14,996) (14,138)
Net change in bank loans 7,559 11,295
Net change in commercial paper outstanding (16,001) 177,338
Net change in long-term debt (4,471) (169,942)
Proceeds from issuance of stock under stock option
and employee stock purchase plans 28,981 7,444
Purchase of treasury stock (10,781) (19,035)
----------- -----------
Net cash used in financing activities (9,709) (7,038)
----------- -----------
Effect of exchange rate changes on cash and cash equivalents (149) (487)
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (285) 1,008
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 12,081 14,858
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,796 $ 15,866
=========== ===========
Interest paid $ 1,524 $ 4,881
Income taxes paid $ 12,599 $ 12,356
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These interim statements and management's related discussion and analysis should
be read in conjunction with the consolidated financial statements and their
related notes, and management's discussion and analysis of results of operations
and financial condition included in the Company's 2003 Annual Report on Form
10-K. These interim statements are unaudited. In the opinion of the Company's
management, all normal recurring adjustments necessary for a fair presentation
of the results for the interim periods have been made.
NEW ACCOUNTING PRONOUNCEMENTS:
In January 2004, the Financial Accounting Standards Board (FASB) issued FASB
Staff Position (FSP) No. FAS 106-1, "Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization Act of
2003" ("FSP 106-1"). The Company has made a one-time election to defer
accounting for any effects of the Act as permitted by FSP 106-1. The Company
will account for the effects of the Act at the earlier of (a) the issuance of
guidance by the FASB on how to account for the federal subsidy to be provided to
plan sponsors under the Act or (b) the fourth quarter of 2004.
STOCK PLANS:
The Company applies the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations in accounting for its stock plans. No compensation
expense for stock options is reflected in net earnings, as all options granted
under such plans have an exercise price not less than the market value of the
common stock on the date of grant. The following table illustrates the effect on
net income and net income per share if the Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards No. 123
for the periods presented:
Three Months Ended March 31,
- --------------------------------------------------------------------------------
(Dollars in thousands except per share amounts) 2004 2003
- --------------------------------------------------------------------------------
Net income, as reported $56,358 $32,017
- --------------------------------------------------------------------------------
Deduct: Total stock-based employee
compensation expense determined under fair
value method for all stock option awards, net of
related tax effects 4,577 3,114
- --------------------------------------------------------------------------------
Pro-forma net income $51,781 $28,903
- --------------------------------------------------------------------------------
Net income per share:
- --------------------------------------------------------------------------------
Basic - as reported $0.60 $0.34
- --------------------------------------------------------------------------------
Basic - pro-forma $0.55 $0.31
- --------------------------------------------------------------------------------
Diluted - as reported $0.59 $0.34
- --------------------------------------------------------------------------------
Diluted - pro-forma $0.54 $0.30
- --------------------------------------------------------------------------------
These pro-forma amounts may not be representative of future results because the
estimated fair value of stock options is amortized to expense over the vesting
period, and additional options may be granted in future years.
NET INCOME PER SHARE:
Stock options to purchase 902,750 and 4,917,152 shares were outstanding for the
first quarter of 2004 and 2003, respectively, but were not included in the
computation of diluted net income per share for the respective periods because
the options' exercise prices were greater than the average market price of the
common shares in the respective periods. Stock options only impact the
calculation of diluted earnings per share.
6
SEGMENT INFORMATION:
The Company's reportable segment information follows. The Company evaluates the
performance of its geographic regions based on operating profit, excluding
interest expense, other income and expense, certain unallocated expenses, the
effects of restructuring items and accounting changes, and income tax expense.
- ------------------------------------------------------------------------------------------------------------------------------------
North Latin Asia
2004 (Dollars in thousands) America Europe India America Pacific Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $163,047 $225,436 $ 13,791 $ 53,737 $79,004 $ -- $ 535,015
Transfers between areas 20,887 47,604 3 287 5,641 (74,422) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total sales $183,934 $273,040 $ 13,794 $ 54,024 $ 84,645 $(74,422) $ 535,015
====================================================================================================================================
Segment profit $ 19,481 $ 63,951 $ 3,247 $ 5,756 $ 12,958 $ 1,060 $ 106,453
=======================================================================================================================
Corporate and other unallocated
expenses (16,297)
Interest expense (6,457)
Other income (expense), net (1,425)
-------------
Income before taxes on income $ 82,274
====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
North Latin Asia
2003 (Dollars in thousands) America Europe India America Pacific Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $ 140,695 $196,369 $ 10,367 $ 51,306 $ 67,487 $ -- $466,224
Transfers between areas 21,314 40,076 248 199 5,004 (66,841) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total sales $ 162,009 $236,445 $ 10,615 $ 51,505 $ 72,491 $ (66,841) $466,224
====================================================================================================================================
Segment profit $ 14,104 $ 53,869 $ 2,440 $ 9,698 $ 11,561 $ (1,565) $ 90,107
=======================================================================================================================
Corporate and other unallocated
expenses (12,565)
Restructuring and other charges (20,389)
Interest expense (8,113)
Other income (expense), net (2,526)
-------------
Income before taxes on income $ 46,514
====================================================================================================================================
RESTRUCTURING AND OTHER CHARGES:
As described in Note 2 of the Notes to the Consolidated Financial Statements
included in the Company's 2003 Annual Report on Form 10-K, in October 2000, the
Company announced a significant reorganization, including management changes,
consolidation of production facilities and related actions.
Movements in the liabilities related to the restructuring charges were (in
millions):
EMPLOYEE ASSET-RELATED
RELATED AND OTHER TOTAL
------------- ---------------- --------------
Balance December 31, 2003 $19.6 $ 1.5 $ 21.1
Cash and other costs (8.1) (0.5) (8.6)
------------- ---------------- --------------
Balance March 31, 2004 $11.5 $ 1.0 $ 12.5
============= ================ ==============
The balance of the employee-related liabilities are expected to be utilized by
2006 as obligations are satisfied and as the final decommissioning and disposal
of the affected equipment occurs.
The Company established accruals relating to the integration of BBA operations.
Costs associated with these integration activities, relating mainly to employee
separation and facility closures, were recorded as a component of purchase
accounting; such costs did not directly impact current earnings.
7
Movements in acquisition accounting accruals were (in millions):
EMPLOYEE-
RELATED
-------------
Balance December 31, 2003 $ 2.4
Cash and other costs (0.2)
-------------
Balance March 31, 2004 $ 2.2
=============
The remaining liability will be utilized in 2004 as obligations are satisfied.
COMPREHENSIVE INCOME:
Changes in the accumulated other comprehensive income component of shareholders'
equity were as follows:
- ----------------------------------------------------------------------------------------------------------------
Accumulated (losses) on
derivatives Minimum Pension
Translation qualifying as hedges, Obligation,
2004 (Dollars in thousands) adjustments net of tax net of tax Total
- ----------------------------------------------------------------------------------------------------------------
Balance December 31, 2003 $ (45,188) $ (3,678) $ (82,815) $ (131,681)
Change (11,424) (6,416) - (17,840)
----------------- ----------------------- -------------------- --------------------
Balance March 31, 2004 $ (56,612) $ (10,094) $ (82,815) $ (149,521)
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Accumulated gains
(losses) on Minimum Pension
Translation derivatives qualifying Obligation,
2003 (Dollars in thousands) adjustments as hedges, net of tax net of tax Total
- ----------------------------------------------------------------------------------------------------------------
Balance December 31, 2002 $(138,175) $ 733 $ (75,038) $ (212,480)
Change 8,030 (821) - 7,209
---------------- ---------------------- -------------------- --------------------
Balance March 31, 2003 $(130,145) $ (88) $ (75,038) $ (205,271)
- ----------------------------------------------------------------------------------------------------------------
BORROWINGS:
Debt consists of the following (Dollars in thousands):
Rate Maturities March 31, 2004 December 31, 2003
---- ---------- -------------- -----------------
Commercial paper (U.S.) $146,932 $ 162,933
Bank loans 37,323 30,610
Current portion of long-term debt 12,669 761
---------------------------------------------
Total current debt 196,924 194,304
---------------------------------------------
U.S. dollars 6.45% 2006 498,741 498,675
Japanese Yen notes 2.45% 2008-11 145,440 141,516
Japanese Yen notes 1.74% 2005 - 11,172
Other 2006 64 861
---------------------------------------------
644,245 652,224
Deferred realized gain on interest rate swaps 36,046 39,685
FAS 133 adjustment (1,130) (1,678)
---------------------------------------------
Total long-term debt 679,161 690,231
---------------------------------------------
Total debt $876,085 $ 884,535
=============================================
At March 31, 2004, commercial paper maturities did not extend beyond April 28,
2004 and the weighted average interest rate on total borrowings was 3.1%
compared to 3.0% at December 31, 2003.
8
INTANGIBLE ASSETS, NET:
The following tables reflect the carrying values for Intangible assets and
Accumulated amortization at March 31, 2004 and December 31, 2003.
(Dollars in thousands) March 31, 2004 March 31, 2004
Gross Carrying Value Accumulated Amortization
-------------------- ------------------------
Goodwill $689,100 $41,534
Other indefinite lived intangibles 19,200 1,184
Trademarks and other 175,210 44,455
-------------------- ------------------------
Total $883,510 $87,173
==================== ========================
(Dollars in thousands) December 31, 2003 December 31, 2003
Gross Carrying Value Accumulated Amortization
-------------------- ------------------------
Goodwill $688,760 $41,534
Other indefinite lived intangibles 19,200 1,184
Trademarks and other 174,699 40,528
-------------------- ------------------------
Total $882,659 $83,246
==================== ========================
The changes in goodwill and intangible assets reflect minor adjustments related
to the Celessence acquisition. Final acquisition accounting will be completed in
2004 pending final valuation of the intangible asset. Estimated amortization
expense will be $3.7 million per quarter for 2004 to 2006. Estimated
amortization expense will be $3.7 million for the first three quarters of 2007,
$2.4 million in the fourth quarter of 2007, and $1.7 million per quarter in 2008
and 2009.
RETIREMENT BENEFITS:
As described in Note 14 of the Notes to the Consolidated Financial Statements
included in the Company's 2003 Annual Report on Form 10-K, the Company and most
of its subsidiaries have pension and/or other retirement benefit plans covering
substantially all employees.
For the first quarter ended March 31, 2004 and 2003, pension expense included
the following components:
U.S. Plans Non-U.S. Plans
-------------------- -------------------
(Dollars in thousands) 2004 2003 2004 2003
------- ------- ------- -------
Service cost for benefits earned $ 2,391 $ 2,117 $ 2,336 $ 2,057
Interest cost on projected benefit obligation 5,070 4,943 6,683 5,891
Expected return on plan assets (5,203) (5,469) (7,208) (6,105)
Net amortization and deferrals 591 177 1,726 1,461
Special termination benefits - 325 - 306
------- ------- ------- -------
Total pension expense $ 2,849 $ 2,093 $ 3,537 $ 3,610
======= ======= ======= =======
The Company expects to contribute $3.8 million to its U.S. pension plans in
2004. In the quarter ended March 31, 2004, $0.7 million of contributions were
made.
The Company expects to contribute $18.5 million to its non-U.S. pension plans in
2004. In the quarter ended March 31, 2004, $2.5 million of contributions were
made.
The special termination benefits in 2003 are the result of termination
agreements in the U.S. and Europe providing for enhanced retirement benefits to
eligible employees.
9
For the first quarter ended March 31, 2004 and 2003, expense recognized for
postretirement benefits other than pensions included the following components:
(Dollars in thousands) 2004 2003
------ ------
Service cost for benefits earned $ 645 $ 688
Interest on benefit obligation 1,304 1,555
Net amortization and deferrals (52) 261
------ ------
Total postretirement benefit expense $1,897 $2,504
====== ======
On December 8, 2003, President Bush signed into law the Medicare Prescription
Drug, Improvement and Modernization Act of 2003. Following the guidance of the
Financial Accounting Standards Board, the Company has elected to defer
recognition of the effects of this Act. The net periodic postretirement benefit
costs in the above table do not reflect the effect of the Act on the plan.
RECLASSIFICATIONS:
Certain reclassifications have been made to the prior year's financial
statements to conform to 2004 classifications.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OPERATIONS
First quarter 2004 sales totaled $535.0 million, increasing 15% in comparison to
the prior year quarter. Reported sales for the 2004 quarter benefited from the
strengthening of various currencies in relation to the U.S. dollar; had exchange
rates remained constant, sales for the first quarter 2004 would have increased
6% in comparison to the prior year quarter.
Sales for the first quarter were strong in all geographic regions although
performance in Europe was primarily the result of favorable currency
translation. For the quarter, sales performance by region was as follows:
o North America flavor sales grew 18% while fragrances grew 13%; in total,
sales in the region grew 15%. The flavor sales performance was driven by
new wins and continued strong order activity across the entire customer
portfolio. Fragrance sales for the quarter increased in all product
categories with fine fragrance sales increasing 10%, functional fragrances
13% and aroma chemical sales 14%.
o European sales increased 14% with fragrances increasing 15% and flavors
14%; sales results benefited from the strength of the Euro and Pound
sterling. Local currency sales declined 1% in both flavors and fragrances.
Local currency sales of functional and fine fragrances increased 4% and 2%,
respectively; aroma chemical sales declined 10%. The local currency
performance reflects modest improvement in some of the major economies of
Western Europe, most notably in France, Italy and Great Britain, offset by
weaker sales in Eastern Europe, the Middle East and Africa.
o Asia Pacific sales increased 15% with fragrances increasing 13% and flavors
17%; sales results benefited from the strength of the Yen and the
Australian dollar. Local currency flavor and fragrance sales each increased
7%. This strong performance reflects improving economic conditions in the
region and the benefit of significant new wins in both fine and functional
fragrances. Local currency sales growth was strongest in Greater China,
Thailand and Vietnam, with respective increases of 16%, 29% and 48%.
Australia, Indonesia, South Korea and Taiwan all grew in the low- to
mid-single digits. Japan sales were flat in local currency which, due to
the strength of the Yen, resulted in a 10% increase in reported dollars.
o Latin American sales increased 9% in both flavors and fragrances. Mexico
and Brazil flavor sales grew 9% and 5%, respectively, while Venezuela and
Central America increased 91% and 50% respectively. Fragrance sales in
Argentina, Venezuela and Central America increased 25%, 89% and 27%,
respectively, while Mexico, Brazil and Colombia sales increased 5%, 6% and
11%, respectively. Performance in the region reflects improved economic
conditions and the benefit of new wins in both flavors and fragrances.
o India sales increased 31% in local currency and 34% in reported dollars.
Local currency fragrance sales increased 25% resulting in a 30% increase in
reported dollars. Flavor sales increased 37% in local currency, resulting
in a 38% increase in reported dollars. In both flavors and fragrances, the
sales performance reflected the benefit of new flavor and fragrance wins
and the continued strength of IFF's business in the Indian market.
The percentage relationship of cost of goods sold and other operating expenses
to sales for the first quarter 2004 and 2003 are detailed below.
FIRST THREE MONTHS
----------------------
2004 2003
------ ------
Cost of Goods Sold 57.3% 58.0%
Research and Development Expenses 8.3% 8.4%
Selling and Administrative Expenses 16.8% 16.3%
Cost of goods sold, as a percentage of net sales, decreased from the prior year
primarily due to improved sales performance and the realization of saving from
the 2003 restructuring activities.
Research and development expenses, as a percentage of sales, were in line with
planned spending. These expenses are expected to approximate 8-8.5% of sales on
a full year basis. Selling, General and Administrative expenses, as a percentage
of sales, increased to 16.8% from 16.3%; this increase resulted mainly from
higher expense accruals under the Company's incentive compensation plans, based
on the first quarter's sales and operating performance.
11
Interest expense declined 20% from the prior year as a result of the Company's
interest rate management and debt reduction initiatives. The weighted average
interest rate on total borrowings during the first quarter 2004 was 3.0%
compared to 3.4% in the 2003 first quarter.
The effective tax rate for the first quarter of 2004 was 31.5% compared to 31.2%
for the comparable 2003 quarter.
RESTRUCTURING AND OTHER CHARGES
As described in Note 2 of the Notes to the Consolidated Financial Statements
included in the Company's 2003 Annual Report on Form 10-K, in October 2000, the
Company announced a significant reorganization, including management changes,
consolidation of production facilities and related actions.
Movements in the liabilities related to the restructuring charges were (in
millions):
EMPLOYEE- ASSET-RELATED
RELATED AND OTHER TOTAL
------------- ----------------- ------------
Balance December 31, 2003 $19.6 $ 1.5 $ 21.1
Cash and other costs (8.1) (0.5) (8.6)
------------- ----------------- ------------
Balance March 31, 2004 $11.5 $ 1.0 $ 12.5
============= ================= ============
The balance of the employee-related liabilities are expected to be utilized by
2006 as obligations are satisfied and as the final decommissioning and disposal
of the affected equipment occurs.
The Company established accruals relating to the integration of BBA operations.
Costs associated with these integration activities, relating mainly to employee
separation and facility closures, were recorded as a component of purchase
accounting; such costs did not directly impact current earnings.
Movements in acquisition accounting accruals were (in millions):
EMPLOYEE-
RELATED
-----------
Balance December 31, 2003 $ 2.4
Cash and other costs (0.2)
-----------
Balance March 31, 2004 $ 2.2
===========
The remaining liability will be utilized in 2004 as obligations are satisfied.
FINANCIAL CONDITION
Cash, cash equivalents and short-term investments totaled $12.3 million at March
31, 2004. Working capital, at March 31, 2004 was $425.1 million compared to
$376.6 million at December 31, 2003. The working capital increase is directly
attributable to an increase in receivables in the first quarter resulting from
the sales performance. Gross additions to property, plant and equipment during
the first quarter were $12.2 million. The Company expects additions to property,
plant and equipment to approximate $80.0 to $85.0 million for the full year
2004.
At March 31, 2004, the Company's outstanding commercial paper had an average
interest rate of 1.2%. Commercial paper maturities did not extend beyond April
28, 2004. Bank loans and the current portion of long-term debt is $50.0 million
at March 31, 2004.
In January 2004, the Company paid a quarterly cash dividend of $.16 per share to
shareholders unchanged from the prior quarter. The Company repurchased
approximately 0.3 million shares in the first quarter of 2004. Repurchases will
be made from time to time on the open market or through private transactions as
market and business conditions warrant. The repurchased shares will be available
for use in connection with the Company's employee benefit plans and for other
general corporate purposes. At March 31, 2004, the Company had $31.2 million
remaining under its authorized October 2002 repurchase plan.
12
The Company anticipates that its financing requirements will be funded from
internal sources and credit facilities currently in place. Cash flows from
operations are sufficient to fund the Company's anticipated normal capital
spending, dividends and other requirements including debt reduction for at least
the next twelve to eighteen months. The Company anticipates that debt reduction
for 2004 will approximate $100 million.
EQUITY COMPENSATION PLANS
The Company intends to grant restricted stock units ("RSU's") in May 2004 as an
element of its incentive compensation plans for all eligible U.S. - based
employees and a majority of eligible overseas employees. Vesting of the RSU's
for the Company's senior management will be performance and time based; for the
remainder of eligible employees, vesting will be time based. As a result of
these awards, the Company expects to record approximately $4.5 million to $6.0
million in pre-tax compensation expense during 2004; the actual expense will
depend upon the value of the Company's stock and the number of RSU's granted.
NON-GAAP FINANCIAL MEASURES
The discussion of the Company's 2004 first quarter results exclude the effects
of exchange rate fluctuations. Such information is supplemental to information
presented in accordance with generally accepted accounting principles (GAAP) and
is not intended to represent a presentation in accordance with GAAP. In
discussing its historical and expected future results and financial condition,
the Company believes it is meaningful for investors to be made aware of and to
be assisted in a better understanding of, on a period-to-period comparative
basis, the relative impact of ongoing exchange rate fluctuations on the
Company's operating results and financial condition. In addition, management
reviews this non-GAAP financial performance measure to evaluate performance on a
comparative period-to-period basis in terms of absolute performance and trend
performance.
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Statements in this quarterly report, which are not historical facts or
information, are "forward-looking statements" within the meaning of The Private
Securities Litigation Reform Act of 1995. Such forward-looking statements are
based on management's reasonable current assumptions and expectations. Such
forward-looking statements, which may be identified by such words as "expect,"
"anticipate," "outlook," "guidance," "may" or similar forward looking
terminology involve significant risks, uncertainties and other factors, which
may cause the actual results of the Company to be materially different from any
future results expressed or implied by such forward-looking statements, and
there can be no assurance that actual results will not differ materially from
management's expectations. Such factors include, among others, the following:
general economic and business conditions in the Company's markets, including
economic, population health and political uncertainties; interest rates; the
price and availability of raw materials; the Company's ability to implement its
business strategy, including the achievement of anticipated cost savings,
profitability and growth targets; the impact of currency fluctuation or
devaluation in the Company's principal foreign markets and the success of the
Company's hedging and risk management strategies; the impact of possible pension
funding obligations and increased pension expense on the Company's cash flow and
results of operations; the effect of legal and regulatory proceedings, as well
as restrictions imposed on the Company, its operations or its representatives by
foreign governments; and the fact that the outcome of litigation is highly
uncertain and unpredictable and there can be no assurance that the triers of
fact or law, at either the trial level or at any appellate level, will accept
the factual assertions, factual defenses or legal positions of the Company or
its factual or expert witnesses in any such litigation. The Company intends its
forward-looking statements to speak only as of the time of such statements and
does not undertake to update or revise them as more information becomes
available or to reflect changes in expectations, assumptions or results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There are no material changes in market risk from the information provided in
the Company's Form 10-K for the year ended December 31, 2003 filed with the
Securities and Exchange Commission.
13
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer, with the
assistance of other members of the Company's management, have evaluated the
effectiveness of the Company's disclosure controls and procedures as of the end
of the period covered by this Quarterly Report on Form 10-Q. Based on such
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
have concluded that the Company's disclosure controls and procedures are
effective.
The Company's Chief Executive Officer and Chief Financial Officer have also
concluded that there have been no changes in the Company's internal control over
financial reporting during the quarter ended March 31, 2004 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
14
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
(e) Issuer Purchases of Equity Securities
TOTAL NUMBER OF SHARES MAXIMUM DOLLAR VALUE OF
TOTAL NUMBER OF PURCHASED AS PART OF SHARES THAT MAY YET BE
SHARES PURCHASED AVERAGE PRICE PUBLICLY ANNOUNCED PURCHASED UNDER THE
(1) PAID PER SHARE PROGRAM (2) PROGRAM
------------------- ------------------- ------------------------------ ----------------------------
January 1 - 31, 2004 - - - $ 42,011,236
February 1 -29, 2004 - - - $ 42,011,236
March 1 - 31, 2004 307,700 $ 35.04 307,700 $ 31,230,166
(1) An aggregate of 307,700 shares of common stock were repurchased during the
2004 first quarter under a repurchase program announced in October 2002.
(2) Under the program, the Board of Directors approved the repurchase by the
Company of up to $100.0 million of its common stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Richard A. Goldstein, Chairman of the Board and Chief
Executive Officer of the Company, Pursuant to Securities Exchange Act
Rule 13a-14(a).
31.2 Certification of Douglas J. Wetmore, Senior Vice President and Chief
Financial Officer of the Company, Pursuant to Securities Exchange Act
Rule 13a-14(a).
32 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of The Sarbanes-Oxley Act Of 2002, signed by Richard A.
Goldstein, Chairman of the Board and Chief Executive Officer of the
Company, and Douglas J. Wetmore, Senior Vice President and Chief
Financial Officer of the Company.
(b) Reports on Form 8-K
The Company furnished the following Reports on Form 8-K since the
beginning of the quarter for which this report on Form 10-Q is filed:
o Report on Form 8-K dated January 28, 2004 furnishing under Item
12 a copy of a Company press release dated January 28, 2004,
regarding the Company's financial results for the fourth quarter
and full year 2003.
o Report on Form 8-K dated March 15, 2004 furnishing under Item 9
certain litigation information regarding the Company's regulation
FD disclosure.
o Report on Form 8-K dated April 29, 2004 furnishing under Item 12
a copy of a Company press release dated April 29, 2004, regarding
the Company's financial results for the first quarter of 2004.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL FLAVORS & FRAGRANCES INC.
Dated: May 7, 2004 By: /S/ DOUGLAS J. WETMORE
--------------------------
Douglas J. Wetmore, Senior Vice President and
Chief Financial Officer
Dated: May 7, 2004 By: /S/ DENNIS M. MEANY
-----------------------
Dennis M. Meany, Senior Vice President,
General Counsel and Secretary
16
EXHIBIT INDEX
Number Description
- ------ -----------
31.1 Certification of Richard A. Goldstein, Chairman of the Board
and Chief Executive Officer of the Company, Pursuant to
Securities Exchange Act Rule 13a-14(a).
31.2 Certification of Douglas J. Wetmore, Senior Vice President and
Chief Financial Officer of the Company, Pursuant to Securities
Exchange Act Rule 13a-14(a).
32 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of The Sarbanes-Oxley Act Of 2002,
signed by Richard A. Goldstein, Chairman of the Board and
Chief Executive Officer of the Company, and Douglas J.
Wetmore, Senior Vice President and Chief Financial Officer of
the Company.